Thursday, July 31, 2014

Capitalism is a Shame

The case of Argentina’s default shows it again: capitalism
is a shame. Argentina has been declared in default, but the default is with them,
the finance people ruling the world, supported by a judicial system that defends
their interests.

Here is a report from Reuters:

Argentina braces for market reaction to second default in 12 years

A woman walks past a graffiti that reads
''No to the debt payment'' in Buenos Aires, July 28, 2014.

Credit: Reuters/Marcos Brindicci

(Reuters) - Argentina
defaulted for the second time in 12 years after hopes for a midnight
deal with holdout creditors were dashed, setting up stock and bond
prices for declines on Thursday and raising chances a recession could
worsen this year.After a long legal battle with hedge funds that rejected Argentina's debt restructuring following its 2002 default, Latin America's third-biggest economy failed to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.Even
a short default will raise companies' borrowing costs, pile more
pressure on the peso, drain dwindling foreign reserves and fuel one of
the world's highest inflation rates."It
is going to complicate life for businesses like YPF which were going to
look externally for financing," said Camilo Tiscornia, a former
governor of Argentina's central bank. State-controlled energy company
YPF (YPFD.BA) needs funds to develop Argentina's huge Vaca Muerta shale formation.Argentina
had sought in vain to win a last-minute suspension of a ruling by U.S.
District Judge Thomas Griesa in New York to pay holdouts $1.33 billion
plus interest. He ruled Argentina could not service its exchange debt
unless it paid holdouts at the same time.A proposal for Argentina banks to buy out the hedge funds' non-performing debt also fell through, sources told Reuters."This
is a very particular default, there is no solvency problem, so
everything depends on how quickly it is solved," said analyst Mauro Roca
of Goldman Sachs.As dire as it is, the situation is a far cry from the mayhem following the country's economic crash in 2001-2001 when the economy collapsed around a bankrupt government. Millions of Argentines lost their jobs.This
time the government is solvent. How much pain the default inflicts on
Argentina, which is already in recession, will depend on how swiftly the
government can extricate itself from its obligations.Buenos
Aires had argued that agreeing to the hedge funds' demands to pay them
in full would break a clause barring it from offering better terms than
those who accepted steep writedowns in the 2005 and 2010 swaps.However,
that clause expires on Dec. 31, after which the government would be
able reach a deal with the funds. Many investors and economists still
hope for a separate solution before then between the holdouts and
private parties."Our
base case is that a default would be cleared by January 2015," said
Alberto Bernal, a partner at Miami-based Bulltick Capital Markets.
He projected that a default would cause the economy to shrink 2 percent
this year compared with a previous market consensus for a 1 percent
contraction.Failure to strike a deal will not cause financial turmoil abroad because Argentina has been isolated from global credit markets
since its 2002 default on $100 billion, but domestic markets that had
rallied on hopes of a deal in recent days will probably reverse course.Yields
on Argentina's key dollar bond due 2033 fell to the lowest level in
about three and a half years on Wednesday, and the country's MerVal
index .MERV hit a record."The correction will depend on perceptions of how long the default will take to solve," said Roca.HOW DIRE A DEFAULT?The default could get much messier and take longer to clear up if creditors force an "acceleration" for early payment on their bonds."How
bad the outcome ends up being depends on whether bondholders
accelerate," said Alejo Costa, strategy chief at local investment bank
Puente."Acceleration would open a new legal battle for the government that could end up in a new restructuring."Argentina
has foreign currency restructured debt worth about $35 billion while
its foreign exchange reserves stand at $29 billion.U.S.
ratings agency Standard & Poor's on Wednesday downgraded the
country's long- and short-term foreign currency credit rating to
"selective default". The default rating will remain until Argentina
makes its overdue June 30 coupon payment on its discount bonds maturing
in 2033, the agency said.Holders
of insurance against an Argentine credit default will have their eyes
peeled for an announcement from the International Swaps and Derivatives
Association (ISDA). If ISDA declares an Argentine default, the total
amount of money that would be paid out is just over $1 billion.After
two days of talks with holdouts in New York, Argentine Economy Minister
Axel Kicillof on Wednesday evening told reporters that Argentina was
not in default because it had made the June $539 million interest
payment to holders of exchanged bonds - even if this had not reached
creditors by July 30, at the end of the month-long grace period.Judge
Griesa called the payment illegal and blocked the funds' onward
transfer to creditors. It remains in limbo in the Buenos Aires account
of trustee agent Bank of New York Mellon.Argentines were sanguine about news of the default."We
have been in a similar situation before, and we will make it through,"
said a 27-year old employee at an automobile firm who declined to give
his full name. "The sun rises each day. It will get resolved, be it next
week, or next month." (Additional Reporting by Richard Lough and Eliana Raszewski; Editing by Ken Wills)

About Me

As a kid I liked numbers and the sound of strings. I considered studying engineering but chose social sciences because of my interest in people. I combine a theoretical interest with a practical, social approach which brought me to the sphere of policy research. I am interested in reducing the disparity between poor and rich, between the powerful and the less powerful.
In 1973 and 1982 I lived in Latin America. In the mid-1980s, I was able to create an international forum to discuss the functioning of the international monetary system and the debt crisis, the Forum on Debt and Development (FONDAD). I established it with the view that the debt crisis of the 1980s was a symptom of a malfunctioning, flawed global monetary and financial system.
I was one of the driving forces behind the creation of the European Network on Debt and Development that was established at the end of the 1980s to help put pressure on European policymakers.
In 1990, before the beginning of the Gulf War, I cofounded the Golfgroep, a discussion group about international politics comprising journalists, scientists, politicians and activists that meets regularly.
The website of FONDAD is www.fondad.org